“Location, search costs and youth unemployment: A randomized trial of transport subsidies in Ethiopia” (Simon Franklin)

Do transport costs hinder young people in the developed world from finding good jobs? Cash constraints and large distances from jobs could be locking some individuals out of labour markets. In this presentation Simon Franklin uncovered the labour market frictions and inequalities that transport costs can create when job seekers are cash constrained. His results are evidence that reducing transport costs leads to better employment outcomes in the context of his study, and further provide an argument for policymakers to support dissemination of vacancy information as well as match-making institutions.

The study

Franklin studied the urban labour market in Addis Adaba, Ethiopia using a randomised control trial. Unemployment in Addis Adaba is high, currently at 24% for those under 30. Most young poor job seekers live outside of the city centre, while firms that offer skilled and professional jobs are clustered within the centre, and so is information about these jobs. Job search is therefore expensive, and costs applicants about 1$ a day. Applicants living far away from the centre have to run down their savings to finance their job search. Given cash constraints, these costs might be high enough to lead them to under-invest in search. To test this, Franklin randomly assigns non-fungible transport subsidies that, twice a week for 9-11 weeks, cover the cost of a return fare to the city centre for job applicants living further than 5km away. This allows him to analyze whether the applicants receiving the subsidy will on average (1) search more and (2) find better jobs. He formalises these hypotheses in a dynamic optimisation model that predicts large treatment effects even for very low levels of risk aversion.

Findings

  1. Reported savings decline over time for job seekers
  2. Transport subsidies prevent job seekers from giving up search
  3. Unemployed who were not actively searching for jobs in the absence of transport subsidies are induced to start search
  4. While subsidies are in place, job seekers who had been actively looking for jobs before the subsidy started are less likely to divert their efforts and engage in temporary work to finance their job search
  5. Impacts are largest among the poorest/ most cash constrained
  6. Impact on search persist after subsidies have ended
  7. No evidence for Hawthorne effects that might invalidate findings

Policy Implications

Franklin’s results carry policy implications of great import, particularly in the context of the big transport overhaul that the government of Addis Adaba is undertaking at the moment. For labour market outcomes to improve, it will be important for authorities to consider ways to keep transport costs low. In this study Franklin tests the effect of subsidies, but, as the discussant Bryce Millett Steinberg highlighted, other solutions could also comprise of loans or cash drops. Complementary to this, the government can improve the functioning of the labour market by providing match-making services of different kinds, starting with better and wider dissemination of job vacancies and going to counseling, guidance and job fairs.

By Sebastian Wolf, Country Economist, IGC Uganda